December 2007 futures prices on the Kansas City Board of Trade hit $9.03 a bushel in late September. July 2008 futures closed that same day at $6.54. “An ‘at the money’ ($6.54 per bushel) hedge-to-arrive forward contract, based on July 2008 futures prices, less historical basis (negative of 30 cents to 40 cents per bushel for Southwest Texas) would mean that all or part of the 2008 wheat crop could be forward priced at $6.14 to $6.24 per bushel. That competes with corn, grain sorghum and other row crops, especially since wheat production normally requires lower capital exposure, compared to corn and other row crops,” Pena says.

U.S. farmers harvested the largest wheat crop in three years in 2007, but fears that the world wheat supply would be inadequate and that shortages may appear likely triggered the rally. Pena says Australia’s production estimates may be revised below the 15.5 million metric ton forecast reported by the Australian government in late September. Drought conditions have hurt production potential.

World ending stocks are also tight, Pena says. The USDA September estimate put world ending stocks at 112.36 million metric tons, the lowest since 1977.That forecast included an Australian estimate of 21 million metric tons that may not pan out.

“The world crop could be as much as 9 million metric tons smaller,” Pena says.

“This would suggest world ending stocks at around 103.3 million metric tons, the lowest since 1975.”

He says the weak dollar is helping move U.S. wheat in the export markets. September import estimate is down by 15 million bushels, a 15 percent decline from August estimates, and 37 million bushels lower than the 122 million bushels imported last year.

USDA expects exports to increase by 25 million bushels from the August estimate and by 191 million bushels over the 909 million bushels exported last year.

“The net effect is that ending stocks were dropped to a very tight 361 million bushels, down 10 percent, from last month and down 21 percent from last year’s 456 million bushel ending stocks figure.”

Pena says some financial analysts predict a short-term wheat market rally with possible price dips of 30 percent within a year. But potential production problems could help sustain the rally, he says. Weather (freezes, drought, or too much rain), along with several diseases, threatens Southwest Texas wheat. He says Norman Borlaug, Nobel Peace Prize winner, reports an “extremely virulent new race (of stem rust) has come onto the wheat production scene.”

“He (Borlaug) indicated that wheat scientists are scrambling to control this disease before it gains a foothold, but said it could cause widespread global wheat shortages that will affect prices and the welfare of several billion consumers. Once again wheat production is threatened by a plant disease,” Pena says.

Pena says the wheat price rally is partially a response to market improvements for grains associated “with increased demand for ethanol. The short-term implication is that wheat now competes with corn, sorghum, cotton and other row crops. When you add the capital exposure, corn carries about twice the risk.